Certified Public Accountant (CPA) Regulation 4

Question 1

Which of the following describes the 'economic substance doctrine' in tax law?

Accepted Answer

Transactions must generate actual economic profit beyond tax benefits to be respected

Answer

The economic substance doctrine requires transactions to have meaningful economic substance and business purpose beyond mere tax avoidance.

Question 2

An individual taxpayer has a $15,000 passive activity loss. How can this loss be used in the current year?

Accepted Answer

It can only offset passive activity income

Answer

Passive activity losses can only offset passive activity income in the current year; excess losses are suspended.

Question 3

Which of the following is a characteristic of a limited liability company (LLC) taxed as a partnership?

Accepted Answer

Members report their share of income on their personal returns

Answer

An LLC taxed as a partnership is a pass-through entity; members report their distributive share of income on their personal tax returns.

Question 4

Under the Sarbanes-Oxley Act, the audit committee of a public company must include at least one member who qualifies as a:

Accepted Answer

Financial expert

Answer

SOX Section 407 requires public companies to disclose whether at least one audit committee member is a financial expert.

Question 5

A taxpayer contributes property with a basis of $20,000 and FMV of $50,000 to a partnership in exchange for a 40% interest. What is the taxpayer's initial basis in the partnership interest?

Accepted Answer

$20,000

Answer

Under IRC Section 722, a partner's initial basis in a partnership interest equals the adjusted basis of the property contributed.

Certified Public Accountant Practice Test

Certified Public Accountant Practice Test

Certified Public Accountant (CPA) Regulation 4